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While small-cap stocks, such as MITCON Consultancy & Engineering Services Limited (NSE:MITCON) with its market cap of ₹581m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into MITCON here.
Does MITCON Produce Much Cash Relative To Its Debt?
MITCON has increased its debt level by about ₹456m over the last 12 months including long-term debt. With this ramp up in debt, MITCON currently has ₹109m remaining in cash and short-term investments to keep the business going. On top of this, MITCON has produced ₹75m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16%, meaning that MITCON’s current level of operating cash is not high enough to cover debt.
Does MITCON’s liquid assets cover its short-term commitments?
With current liabilities at ₹162m, the company has been able to meet these commitments with a current assets level of ₹348m, leading to a 2.15x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Professional Services companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MITCON service its debt comfortably?
MITCON is a relatively highly levered company with a debt-to-equity of 52%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.
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MITCON’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how MITCON has been performing in the past. I recommend you continue to research MITCON Consultancy & Engineering Services to get a more holistic view of the small-cap by looking at: